Risk Management
Conserving your wealth.
Starting out
The Paycheck – Explain?
Biweekly Paycheck for Annual Salary of $30,643
Gross Pay
Social Security (6.2%)
Medicare (1.45%)
Withholding taxes
Medical Premium
401K
Net Pay
1178.26
73.05
17.08
117.83
22.20
47.13
Employer Contribution
Social Security
Medicare
State Unemployment
Medical Premium
401K
73.05
17.08
22.35
101.16
47.13
900.96
Worker's Compensation
33.95
Federal Unemployment
2.15
296.87
Analyzing your paycheck
• Go home and look at your paycheck in
(some of these are only available on
employer websites)
• Share with the class all the items on
your paycheck and be prepared to
explain what they are
Social Security – The Big Picture
• Workers paying Social Security taxes: 156.5 million
• Tax Rate (on both the employee and employer): 5.3
percent for old age (in 2007) 0.9 percent for disability
• Medicare Tax Rate (on both the employee and
employer): 1.45 percent of salary
• Maximum wage taxed: $ 97,500 (in 2007)
• Total Receiving benefits 39.7 million
– Retired workers 30.0 million
– Wife, husband, child of retired worker 3.1 million
– Survivors 6.7 million
• Average monthly benefit: Retired workers $ 955
Social Security
• Started in 1935 as safety net for elderly
• Has three programs:
– Old age and survivor insurance (OASI) –
provides income for elderly and their
survivors
– Disability insurance (DI) – provides income
for those disabled and unable to earn their
support
– Medicare – health insurance for the elderly
Social Security Benefits
• Considered fully insured if you’ve worked 40
quarters (ten years)
• Those who earn the most get the most but
lower-income folks get relatively more
• Can retire at age 62 (reduced benefit) –
benefits increase the more you work
• Actual benefit calculation is complicated so
you are encouraged to get and review your
social security statement every year
• www.socialsecurity.gov
Issues with Social Security
• Accounts for 3.54% of our GDP (total
economy of the US)
• Right now more contributions than benefits being
paid because 4 workers to every retiree
• Government is borrowing surplus for other spending
• In 2017 will pay more benefits than contributions
• In 2040, 2.5 workers for every retiree only able to pay
74 cents of every dollar of benefits
Exercise in Reading Social Security Statement
• Download “Your Social Security Statement” from
www.socialsecurity.gov
• Answer the following:
–
–
–
–
–
–
Only individuals pay social security tax (T/F)
What is the maximum salary taxed?
What part of the statement should be checked every year?
You can’t retire before age 65 (T/F)
How much will this individual get if she retires at age 65?
This is an accurate amount that she can depend on. (T/F)
What are employee benefits?
• Benefits that are given to the individual in the
workplace (you have to be working)
• Based on partnership between individual,
employer, and government
– Individual may contribute share
– Employer contributes
– Government may provide some (social security
and Medicare) or provide tax benefits to
employers
What are employee benefits
• The most common employee benefits
are:
– Retirement benefits
– Healthcare benefits
– Leave or days off with pay
– Disability
Class Activity – Benefits
What kind of benefits do you get at IBM?
http://www-03.ibm.com/employment/us/pb_benefits.shtml
Check out local company benefits
•
•
•
•
•
•
http://www.boeing.com/employment/benefits/us_benefits.html
http://www.starbucks.com/customer/faq_qanda.asp?name=jobs
http://members.microsoft.com/careers/mslife/benefits/plan.mspx
http://www.seattle.gov/personnel/employment/benefits.asp
http://www.costco.com/Service/FeaturePageLeftNav.aspx?Product
No=10045087
http://www.wamu.com/about/jobs/whyworkatwamu/benefits.asp
• Form groups and research these
companies.
• Present your findings to the class.
Look at your own benefits
• Investigate the benefits offered by your
employer.
• Reflect on what they are and how they
help you.
Risk management in your 20s
Risks of insurance
• Being uninsured/under-insured and unable to absorb
the costs of the occurrence without taking a hit to
your net worth.
• Being over-insured and paying for insurance that will
not increase the benefit that you receive.
• Not being in compliance with state law and suffering
the consequences.
• Being ill informed and thinking you were covered
adequately and discovering you were not covered
adequately after the event occurred.
16
Auto insurance
17
Auto insurance liability
• Bodily injury. This covers damage you have done to
someone else involved in an accident for medical
expenses, lost wages and pain and suffering from the
accident. There are limits per person and for the accident
in your policy.
• Property damage. Damage to another’s property caused
by you or by someone who is driving your car with your
permission is the second kind of liability covered by auto
insurance.
• Uninsured/underinsured motorist. This coverage protects
you if you are involved in an accident with a person who
is not insured. It takes the place of the insurance that the
driver should have purchase. It can cover bodily injury
and property damage.
18
Coverage for you
• Personal injury protection (PIP): Covers medical expenses
for injuries sustained in an automobile accident, income
replacement coverage and funeral expenses
• Collision coverage: This covers damage to your car that is
caused by a collision or your car hitting something else.
• Comprehensive coverage (other than collision): This covers
damage to your car that is not caused by collision. For
example, if a tree falls on your car or someone breaks into the
car and damages it.
19
Rates depends on risk
• Insurance companies charge based on risk:
– Preferred market -- This market refers to low-risk
drivers with exceptional driving records. These
folks enjoy the lowest premiums.
– Standard market -- This market refers to the
average driver who uses family-type cars and has
a reasonably good driving record. Insurance
premiums are higher.
– Non-standard market -- Some drivers have a
hard time obtaining insurance. This can result
from a poor driving record, type of vehicle, claims
20
history, experience, etc.
Would the following make your insurance higher
or lower?
•
•
•
•
•
•
•
•
•
Married
Over 65
Under 25 and male
Low crime neighborhood
Drive less than average miles in a year
No traffic violations
Two previous accidents
High deductible for collision
Low deductible for comprehensive
21
Buying your insurance
• Agents - represent either specific companies or a number of
companies. Commission based.
• Direct Writers - insurance company sells its policies through
salaried employees who are licensed agents and represent that
company exclusively. The company does not usually pay a
commission to agents.
• Brokers - represent and work for you, but they also work for the
insurance companies that pay them. Typically, you tell the
broker the type of coverage you want and the amount you want
to spend. Brokers survey the market and bring back options for
you to review. Brokers also receive a commission on their sales.
22
Research thoroughly
•
•
•
•
Make sure that it is financially stable by checking its AM Best
(www.ambest.com) and Standard and Poors (www.standardandpoors.com)
ratings.
Check customer satisfaction. Consumer Reports (also available at your
local library) publishes information on that. Check other rating services such
as JD Powers Ratings
http://www.jdpower.com/finance/ratings/auto_insurance/index.asp
Go the Washington state Insurance Commissioner’s website and check on
its complaint record
(https://fortress.wa.gov/oic/complaints/auto.aspx?Year=2005).
Make sure the company you’re considering is licensed to do business in
Washington. If you have questions about a company, call the Washington
state Insurance Consumer Hotline at 800-562-6900.
23
Activity – Evaluate insurance companies
• The three largest auto insurers are:
– State Farm
– Safeco
– Farmers
• Evaluate these on financial stability,
customer satisfaction and complaints.
24
Shopping for insurance
1. Buy a car that is not expensive to insure.
2. Make a list of all the people in your household who have driver’s
licenses.
3. Make a list of all the coverage you want using the table below.
4. Pull your credit report to see and correct any errors.
5. Have a history of your auto claims and traffic violations.
6. Use internet quoting services to get an idea of how much your auto
insurance will cost and keep it in a file.
7. Check rating services such as Consumer Reports and JD Powers. Ask
a reputable auto body repair shop which insurance company is the
best. Check the Washington state Insurance Commissioner for
complaints. Check for financial stability at AM Best or Standard and
Poors.
8. Call the agent or broker for the insurance company you want to check
25
out.
9. Get the quote in writing.
Activity
• Using the auto coverage above, go to
the following sites and get a quote for
auto insurance for yourself. Were the
rates different?
• www.esurance.com
• www.geico.com
• www.gmac123.com
• www.progressive.com
26
Get your credit score
• http://bankrate.com/brm/fico/calc.asp?lp
id=BKRATE29
• What factors do credit rating services
use?
27
Credit Score
28
Your rights on credit
•
•
•
•
Insurers are restricted from increasing your rates if you don't have a credit
history unless they have documented with the Insurance Commissioner that lack
of credit history results in more risk.
Insurance companies cannot use your credit history to cancel or non-renew your
current insurance policy. They cannot deny you coverage based an absence of
credit history, number of credit inquiries, purchase of a vehicle or house that
increases the amount of debt you have, particular use type of credit or charge
card, or total amount of available credit.
If you are applying for new coverage, the insurance company cannot use just
your credit score. It must also consider other substantive factors when deciding
whether or not to offer your coverage.
By law your insurance rates cannot be based on these number of credit
inquiries, the initial purchase of a new vehicle or house that increases the
amount of debt you have, particular use type of credit or charge card, or total
amount of available credit, or total amount of available credit, or an absence of
credit history unless they have documented that this causes more risk.
29
Credit score and insurance
1. Ask your insurance agent or company if they use credit information,
how they use it and whether it affects your premium.
2. Get a copy of your credit report from each of the three national credit
bureaus and correct any errors.
3. Tell your insurance agent and company about any errors, and tell them
your side of the story.
4. Improve your credit history if you have had past credit problems. Ask
your agent or company for the primary reasons (factors) that your
insurance credit score is low and work to improve those pieces of your
credit history.
5. If you are paying higher premiums because of your credit history, ask
your insurer to re-evaluate you when your credit improves.
6. Shop around for insurance. Insurance companies use credit information
in different ways, so your rates can vary dramatically from company to
company.
30
You’ve had an accident, what should you do?
31
Healthcare insurance
32
Healthcare costs are rising
33
Healthcare Benefits
•
•
•
•
Protect workers from financial loss with serious illness or injury
Promoting health leads to increased productivity (less sick days)
Way to recruit workers
Who is covered:
– 101.5 millions workers covered by employment-based health
benefits
– 76% through own employer and 24% through a family member
– 14.9 million nonworking adults and 42.9 million children
• Who offers health coverage:
– 100% of employers with 200 or more employees offered health
benefits
– 61% of employers with 3 to 199 workers offer health benefits
Healthcare Benefits
Percent of Workers and Healthcare Benefits
Prescription Drugs
Vision
Participate
Access
Dental
Medical
0%
10%
20%
30%
40%
50%
60%
70%
80%
Medical coverage
• 80% of workers between 16 and 64 are offered medical
coverage and 82% of these folks took it
• When you start a job, there is typically a waiting period before
you are covered. Workers in retail have to wait on average 2.8
months before they are covered. Workers in service have to wait
on average 1.5 months
• Many companies also cover employee dependents
• Employees share in the cost of the coverage. In 2004,
employees paid on average $47 per month for single coverage
and $222 per month for family coverage.
– Employees cover:
• 18% of single coverage (average cost to employer $246.72 per month)
• 30% of family coverage (average $592.38 per month)
• Some employers have healthcare reimbursement accounts
which allow employees to pay for out-of-pocket costs with pretax
dollars
Medical coverage
• All plans limit payment and require
employees to share
– Deductible ($100 to $500) – requires employee to
cover the first dollars used in a year
– Coinsurance (typically 20%) employee has to pay
a portion of expenses, some services have
employee pay fixed fee per visit
– Out-of-pocket limit ($3000 - $3300) once
employee has reach the out-of-pocket limit, the
rest of expenses will be covered
– Lifetime limit ($1 million) once employee has
reach this, plan will not longer cover any expenses
Medical coverage
• Most plans cover: medical expenses for hospital and
doctor fees, surgical expenses, anesthesia, x-rays,
laboratory fees, emergency care, maternity care.
• Some plans cover: physical exams, preventive care,
health screenings, chemical dependency treatment,
prescription drugs, dental, vision, mental health or
psychiatric care, home health, nursing home and hospice
care.
• Must be medically necessary.
• Must be usual, customary and reasonable.
• Restrictions on how much they will pay for certain kinds of
care
• Many require pre-certification before hospitalization
• Pre-existing conditions may require waiting period
Types of Plans
• Indemnity - pay their share of the costs of a service only after
they receive a bill for you. More record-keeping involved.
• Managed care
– HMO - HMOs offer members a range of health benefits, including
preventive care, for a set monthly fee.
– PPO - has arrangements with doctors, hospitals, and other
providers of care who have agreed to accept lower fees from the
insurer for their services.
– PSO -HMOs offer an indemnity-type option known as a POS plan.
Members can refer themselves to doctors outside the plan and still
get some coverage.
Evaluating a Health Plan
• Which of these two health plans would you choose?
• http://www.ghc.org/health_plans/pdf/ValueActive07.p
df (Pages 9 to 12)
• http://www.wa.regence.com/docs/summary/individual
/2007/breakthru50Summary.pdf
• Use Health Plan Evaluation Checklist
Healthcare reimbursement accounts
• Employees may be able to set aside pretax
salary dollars for healthcare expenses
• Usually must determine the amount at the
beginning of the year and salary dollars are
accumulated into the account over the year
• Submit medical claims for dollars – must have
documentation
• “Use or lose” – dollars not used for medical
expenses will be lost
Healthcare Savings Accounts
• Health Savings Accounts (HSAs) allow you to pay for
your current health care expenses and to save for
future qualified medical and retiree health expenses
on a tax-free basis.
• Must have a High Deductible Health Plan (HDHP) an annual deductible of at least $1,050 for an
individual’s coverage or $2,100 for family coverage.
• For 2006, the maximum amount you can deposit into
an HSA is:
– $2,700 for single coverage
– $5,450 for family coverage
• If you are age 55 or older,42 catch-up.
Healthcare insurance
1. Write down all your current and anticipated health needs.
2. Use the Health Plan Evaluation Form to compare health plans
offered to you.
3. Consider setting up a flexible spending account to cover
expenses your health plan doesn’t reimburse.
4. Keep good records of all health care spending for
reimbursement and filing taxes.
5. If you have a high deductible health plan, consider setting up a
Health Savings Account.
6. Follow instructions and ask questions of your health care
provider.
7. Stay healthy by establishing good eating, exercise and other
wellness habits.
43
Case Study
• Jill’s healthcare plan has a $200
deductible. She just had the following
medical expenses:
– $150 doctor visit
– $300 mammogram
• Assuming that these are within the limits
set for each of these procedures, what
will Jill get in reimbursement?
Case Study
Description
Submitted
Approved
Paid
Oral Evaluation
20.67
20.67
18.6
Prophy - Adult
26.81
26.81
24.13
Fluoride Adult
10.47
10.47
9.42
Here is an explanation of benefits paid under
a dental plan.
Using what you earned about healthcare
benefits, explain what each column is.
Homeowners insurance
46
Homeowner’s insurance
• Dwelling coverage. This coverage provides money for the
repair or rebuilding of your damaged or destroyed home
and attached structures, such as a garage or deck up to
the limit defined in the policy. Usually water damage and
earthquakes are not covered under this.
• Coverage for other structures. This coverage provides
for the repair or replacement of other permanent, separate,
unattached structures on your property. The limit is
typically 10 percent of the dwelling coverage.
• Personal property coverage. This coverage provides for
repair or replacement of your furnishings and personal
items, such as your TV, stereo, clothing, dishes, etc. This
is usually set at 70 percent of the dwelling coverage.
47
Coverage
• Coverage for loss of use or additional living
expenses. This coverage pays for your living
expenses if you can’t live in your house.
• Medical payments coverage. This coverage pays
the medical expenses of others when they are
accidentally injured on your property.
• Personal liability coverage. This coverage pays
expenses for bodily injury and property damage
sustained by others when you are legally liable.
48
Perils
49
What is covered?
•
•
•
•
•
•
•
•
•
•
•
•
flood damages
Items are stolen from your home
vehicles such as cars, boats and motorcycles stolen from or damaged
on their property
a person falls off your deck and sues
a break in the water line on their property supplying water to their home
a fire in your house
damages due to a break in the sewer line on their property that
connects to their municipal sewer system
damages from earthquakes
damages from mold
damages from termites or other infestation
your windows are shattered by a windstorm
pets stolen from or injured on their50property
Shopping for house insurance
1. Do an audit of your house and install safety features.
2. Do an inventory of your personal property. Get appraisals as
necessary.
3. Do research on how much it will cost to replace your home.
4. Consider your assets in determining your personal liability coverage.
5. Make a list of all the coverage you want using the table below.
6. Pull your credit report and correct any errors.
7. Have a history of your house insurance claims.
8. Check rating services such as Consumer Reports. Check the
Washington state Insurance Commissioner for complaints. Check for
financial stability at AM Best or Standard and Poors.
9. Call the agent or broker for the insurance company you want to check
out.
10. Get the quote in writing.
51
11. Compare all quotes and choose the best for you. Don’t be rushed or let
What should you do if you have a claim?
52
When you have a loss:
1. Notify your agent or insurance company and ask what documents, forms, and
other data you need to get your claim processed.
2. Review your policy and ask your agent or insurance company for an explanation
of what is covered.
3. Protect your property from further damage. Save the receipts for temporary
repairs and submit them to the insurance company for reimbursement. You
should not make permanent repairs until after your insurance company has
inspected the damaged property.
4. If you are unable to live in your home, tell your agent or insurance company
where they can reach you.
5. Itemize your losses and include copies of receipts for larger items, such as large
appliances, furniture, expensive cameras, and computer equipment. If the loss is
due to a criminal act, such as burglary or theft, notify your local law enforcement
agency.
6. You must prove your loss with receipts. If you don’t have receipts, then photos
of the damaged or missing items may help document the loss. If your insurance
company requires you to submit a “proof
of loss” form, complete and submit it in
53
a timely and accurate manner. This will help prevent claim processing delays.
Renter’s insurance
• Personal liability (protection against claims someone
else makes against you)
• Premises medical coverage (pays the medical
expenses of others accidentally injured on the
property you rent)
• Additional living expense (pays for your living
expenses if the living space you rent is deemed
unlivable)
• Personal property (contents) coverage. Be aware that
standard renter policies only cover the actual cash
value at the time of the loss.
54
• It does not cover the building, but it may cover any
Risk management in your 30s
Retirement benefits
• Provide for the individual in old age
• Traditionally think of age 65 as retirement age
when individual gets to enjoy sunset years
– Now some people set financial goals of retiring
before 65
– Individuals enjoy working and work past 65,
sometimes to age 90+
– Some individuals take a reduced work schedule
– Some individuals take on new challenges
Retirement benefits
• Defined benefit plans (traditional
pension plans)
• Defined contribution plans (401Ks,
IRAs, profit sharing plans, and more)
• Social Security
Employer Retirement Benefits
60% of all workers have access to retirement
benefits (51% participate)
– 69% of white-collar workers
– 62% of blue-collar workers
– 34% of service occupations
Issues in retirement planning?
IRA/Keogh
Percent of Total Assets in Qualified Retirement Plans
State/Local
100%
Federal
Private Insured
Defined Contribution
80%
Defined Benefit
60%
40%
20%
0%
1985
1988
1991
Source: Employee Benefits Research Institute
1994
1997
2000
2002
Issues in retirement planning
• It’s up to you and not your employer –
save in a tax-advantaged way
• How much should you save? Lots of
opinions but 10% to 15% a year will be
a good safety net
• Don’t cash out retirement savings – it
costs you a lot
Defined Benefit
• 20% of all workers participate in a defined benefit
plan
– 22% of white-collar workers
– 25% of blue-collar workers
– 7% of service occupations
• “Traditional” pension plan based on:
– Number of years of service
– Highest average salary
– Must be “vested” or have worked for the company for a
number of years
– Retirement benefit is paid for the rest of life (lifetime annuity)
Defined Benefit – A simplified example
Jill has worked for company XYZ for 20 years. XYZ has a defined
benefit plan that gives 1.5% of the highest average five years’
salary for every year of service. Employees vest after 7 years of
service. Jill’s highest average salary for five years prior to
retirement is $50,000.
• Jill’s annual retirement income until she dies will be:
• $50,000 x 20 x 1.5% = $15,000
• What would Jill’s retirement income be if she worked 10 years?
• What would Jill’s retirement income be if she worked 30 years?
Note: Most defined benefit plans have a social security offset
meaning they will deduct from your retirement income if you are
also entitled to social security. For the purposes of this exercise, we
are leaving the social security offset out.
Defined Benefit – Another example
• Sam worked for company XYZ for 5
years. His average salary for five years
prior to retirement is $50,000.
• Sam’s pension will be $0 because the
vesting requirements are 7 years—
therefore Sam has to have worked 7
years to get any retirement income.
Defined Benefit Plans
• Good news:
– Lifetime income
– Up to employer to make sure that money is there
• Bad news:
– Have to have worked at company a long time to
get sufficient income (most people don’t work at a
company for very long)
– Expensive for employers so they are getting rid of
them
– When you die (unless joint and survivor is
selected), it goes away
Less employers offer defined benefit plans
Percent of employees covered by traditional
pension plans
40
35
30
25
20
15
10
5
0
1978
1980
1982
1984
Source: Bureau of Labor Statistics
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Other considerations
• Joint and Survivor – Annuity continues
for spouse if s/he outlives the employee
– retirement income will be lower
• Early retirement results in reduced
retirement income
• Plans generally pay full benefits on
disability but disability benefits may be
tied to age and/or years of service
Defined Contribution Plans
• 54% have access to defined contribution plans and 43%
participate
• 53% of white-collar occupations
• 40% of blue-collar occupations
• 20% of service occupations
• Employees make contributions to retirement savings plan
• Employers may match contributions up to a certain amount
• When employee leaves company, the money goes with him or
her (portable)
• Retirement income depends on how much employee contributes
and the returns on the money
Defined Contribution Plans
• Most common defined contribution plan
is 401K
– 43 million participants
– 457,830 plans
– $2.1 Trillion in assets
401K – How it works
• Salary is typically contributed pretax – will reduce
your salary for tax purposes
• Maximum contribution $15,000 (2006) with an
additional catch-up of $5000 for those over 50 years
old
• 82% of employees contribute
• On average participants put in 6.8% of salary
• 91% of employers match your contributions up to on
average 3.3% of your salary
• There is a 10% penalty for withdrawing before age 59
½ and you have to pay taxes on your withdrawal
• When you leave your company, you may rollover
your 401K to a Individual Retirement Account (IRA)
401K – How does it work?
• Jill is single and makes $30,000 a year
gross salary and she wants to put
$1800 away for retirement in 30 years.
• She is considering three options:
– 401K contribution
– Traditional IRA contribution
– Roth IRA contribution
Traditional IRA
• Jill’s income level is low enough (less than
$32,000) to put money away pretax into a
traditional IRA
• IRAs like 401Ks may have
– Her salary for tax purposes is reduced by $1800 to
$28,200 so she pays less taxes now
– In 30 years, at 8% return, Jill has $18,113 which
will be taxed when she takes a distribution
Roth IRA
• Jill’s income level is low enough to put
money into a Roth IRA (less than
$90,000 for single)
– Her salary is not reduced so she has no
tax savings now
– In 30 years, at 8% return, Jill has $18,113
which will be NOT be taxed when she
takes a distribution
401K
•
Jill puts 6% ($1800) in a 401K. Her
company matches up to 50 cents for every
dollar the employee contributes up to 6%.
–
–
–
Her salary for tax purposes is reduced by $1800
to $28,200 so she pays less taxes now
Her company matches 3% of $900 so the total
contribution is $2700
In 30 years, she will have $27,169 which will be
taxed when she takes it out
401K, IRA or Roth IRA for Jill?
• If a company matches, 401K is best up
to the maximum of the match
• If your tax rate is low now and higher
when you retire or you want more
flexibility on your distribution, the Roth
IRA is the next best
Risks with 401K
• 18% to 25% of employees don’t
participate or contribute
• About half of those under 25 contribute
• Participants don’t know how to allocate
assets (100% company stock is a risk)
• When people leave company they cash
out their 401Ks instead of rolling it over
Impact of contributions versus return
Average Account Balances by Age
160000
20s
30s
140000
40s
50s
60s
120000
100000
80000
60000
40000
20000
0
1999
2000
Source: Investment Company Institute
2001
2002
2003
2004
Asset Choices
• Equity – stock funds – these have the highest
potential return and highest risk (volatility or tendency
to go up and down)
• Fixed income – bond funds Company stock – the
employer’s stock
• Money market funds – basically cash at short term
interest rates
• Stable value funds or GICs – guaranteed investment
contracts or value stocks
• Balanced funds – Part stock and part bond
• Lifestyle funds – Funds in which assets are allocated
according to age or risk tolerance
401K Asset Allocation
401K Allocation of assets by year
60%
Percent of total assets
50%
1996
1999
2002
2003
2004
40%
30%
20%
10%
0%
Equity Funds
Balanced Funds
Company Stock
Bond Funds
Money Funds
GIC/Stable Value
Funds
401K Asset Allocation
Fixed Income
Portfolio shifts from
equity to fixed income
as participant grows
older
Participants
Company stock
Balanced funds
Equity funds
20%
52%
in 60s
13%
13%
Participants
in 20s
Equity funds, 37%
Balanced funds, 10%
Source: Investment Company Institute
Fixed Income, 38%
Company stock, 13%
Cashing out
• Jill is leaving her company and has a balance
of $6000 in her 401K
• She’s happy about the new job where she is
getting a $2000 raise
• She’s going to cash out her 401K and put a
down payment on a new car—after all, she
deserves it and she has another 30 years to
save for retirement.
• What is this costing her? Her personal tax
rate is 15%.
Cashing out
• When she cashes out, she will pay a
10% penalty of $600 plus taxes on her
$6000 (at 15%) or $900. So $1500 is
out the door leaving her with $4500.
• That’s not the entire cost, in 30 years
that $6000 at 8% return would be
$60,376.
401K Checklist
1. Try to put away 10% to 15% of your income for retirement.
2. Max out on the employer contribution. This is money that you shouldn’t
leave behind.
3. Invest in index funds and save on fees.
4. Avoid taking out a loan on your 401K.
5. Determine an asset allocation that makes sense for your time horizon.
6. By setting aside your money every paycheck you will automatically be
using dollar cost averaging to buy your funds.
7. Rebalance your portfolio to keep your designated asset allocation.
8. Ask about fees. You can lobby for a lower cost provider if you think that
fees are too high.
9. Don’t cash out your 401K when you leave a company. It can hurt you in
the future.
Medicare
• Federal healthcare program for elderly and disabled
($317.7 billion)
– 35.4 million elderly
– 6.3 million disabled
• Eligibility: Workers over 65 who are eligible for Social
Security and their eligible spouses
• Three parts:
– Part A: Inpatient hospital care – paid by current workers and
employers
– Part B: Outpatient services – Eligible pay monthly premium
– Part D: Prescription drugs
Risk management in your 40s
and 50s
Disability
• Disability costs are 6% to 12% of payroll
• One out of 7 people become disabled for 5 or
more years before reaching age 65
• 3 out of 10 workers are disabled for 90 days
or more
• 11.6% people aged 16-67 had a work
disability
• 5% have disability that prevents them for
working
Social Security Disability
• Disability is defined as so severely impaired, mentally
or physically, that an individual cannot perform any
substantial gainful work and must last for continuous
period
• Disabled worker receives monthly benefit equal to
primary insurance amount at the time disability
occurred – has to have 20 credits
• Waiting period is five full calendar months
• As of 2004:
– 6.2 disabled workers and 1.8 million dependents were
receiving an average month benefit of $862
Workers’ Compensation
• Pays for medical care and cash benefits for
workers who are injured on the job or who
contract work-related illnesses
• In 2002, $53.4 billion in workers’
compensation ($24.3 B medical care and
$29.2 B cash benefits)
• Waiting period of 3 to 7 days
• Cost of workers’ compensation was declining
between 1990 and 2000 due to managing
health care costs, stricter eligibility and better
prevention
Short-term disability
• 70% of private employers offer shortterm disability
• Usually covers 100% of wages for a few
weeks
Long-term disability
• Only about 25% of private employers have long-term
disability
• Waiting period of 3 to 6 months or when short-term
disability is in effect
• Eligibility may be the same as for Social Security
• Generally designed to replace 60% of earnings and
will be reduced by workers compensation and social
security disability payments
• If the employee pays premiums for this, the income is
not taxed
Unemployment Insurance
• Federal Unemployment Tax Act (FUTA) imposes tax on wages
and states may add their own tax based on turnover
• Worker must have earned a certain amount of qualifying wages
• One week waiting period
• Worker must be able and available for work, actively seeking
wor, and free of any disqualifying event (quitting voluntarily,
discharge for misconduct, refusal of suitable work or being part
of labor dispute)
• Benefits based on percent of worker’s earnings over a recent
52-week period
• Benefits paid for a maximum of 26 weeks
• Additional weeks may be available in times of high
unemployment
Disability income insurance
• Disability strikes one in four workers before age 65.
• According to the US Department of Housing and Urban
Development, 46% of conventional mortgage
foreclosures were attributed to disability and only 2% to
death.
• According to research by the U.S. Department of
Education and the National Institute on Disability and
Rehabilitation, the most common causes of long-term
disability are heart disease, back injuries, and cancer,
followed by anxiety and depression.
91
Factors to consider
•
•
•
•
•
•
•
•
•
•
•
Definition of disability (own or any occupation)
Elimination period before benefits start
Length of benefit period (years or to age 65)
Benefits for partial disability
Percent of lost income replaced (typically 60%)
Return to work programs
Recurrent disability what happens if I return to work and then
relapse
Cost of living adjustment
Mental health/substance abuse provisions
Noncancellable or guaranteed renewable
Exclusions or other limitations.
92
Life insurance
• Protect your family in event of your
death
– Term life insurance – most benefit for
premium
– Permanent life insurance – whole life,
universal, and variable universal. Has a
saving component.
93
Questions to ask
• How much do I provide for my dependents for how many years?
This includes children, parents and others who depend on you
for financial support.
• Do my children have college tuition needs that I have to provide
for?
• Are there family members or organizations that I want to leave
money to?
• Will there be estate taxes that have to be paid when I die?
• Will there be funeral arrangements that have to be paid when I
die?
• Total up your assets and other sources of death benefits such
as social security and life insurance provided by your employer.
94
This will give you an indication of how much life insurance you
Risk management in your 60s
and beyond
Long term care insurance
•
•
•
•
•
•
•
•
•
•
have assets to protect
can afford the premium
are not currently disabled
want to ensure control
over your assets
• don’t qualify for Medicaid
• you want to protect your
family from having to
provide the care
have few assets
can’t afford the premium
are already disabled
qualify for Medicaid
have other insurance
have enough assets so you
can set aside the money for
care yourself
• have no family or causes
you want to bequeath your
assets to.
96
Estate planning
•
•
•
•
•
•
•
•
Will - Every person 18 years of age or older has the right to execute a will, leaving his or her
property to any person or entity.
No Will (Intestacy) - When there is no will or other estate planning arrangement, the
"intestacy laws" specify persons entitled to the property.
Gift By List - Under Washington law, certain types of personal property, mainly "tangible
personal goods," can be bequeathed through a listing which is separate from a will.
Joint Tenancy - Bank accounts, stocks, bonds and real estate are often owned in joint
tenancy, with a right of survivorship. Under this arrangement, after the death of one of the
owners, the property automatically passes to the surviving owners.
Living Trust - A revocable living trust is a legal tool that can benefit some people by
avoiding probate.
Community Property Agreement - Washington is a community property state. That means
most property acquired during a marriage is presumed to be owned equally by husband and
wife.
Durable Power of Attorney - A durable power of attorney is a document that appoints
someone to act on your behalf.
Durable Power of Attorney for Health Care - A provision citing HIPAA requirements
should be included in the health care proxy emphasizing your wish that your health care
providers disclose health-related information to your health-care agent if they request such
information.